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Dear CEO: FCA informs asset managers of concerns for 2020

Best to be proactive

Risk & Analytics|Financial, Executive and Professional Risks (FINEX)

April 21, 2020

In light of COVID-19, the U.K. Financial Conduct Authority recently updated its “key risks of harm” for asset managers.

The U.K. Financial Conduct Authority (FCA) has spent the first few months of the year directly informing asset management firms of its regulatory priorities for the year through a series of so-called “Dear Chief Executive” letters.

The regulator’s latest correspondence, a Dear Chief Executive letter dated March 30, is addressed to firms providing services to retail investors. Much has been written about COVID-19 and the resulting increase in potential liabilities facing the management of asset managers as a result of remote working, cyber risks, third party litigation, insolvency to name a few. However, don’t be fooled, COVID-19 will pass and the regulatory agenda will shift back to the agenda as stated within a Dear Chief Executive letter dated January 20 but more so, with the benefit of hindsight and how asset managers coped during the crisis.

The January 20 letter outlined the FCA’s view of the “key risks of harm”, highlighting the asset management industry’s role to “protect and grow the capital of its customers and to oversee their investments effectively over the long term.”

Furthermore, the FCA went on with the “polite reminder” that, to deliver on this, firms need to act in the best interests of their customers and stated: “overall standards of governance, particularly at the level of the regulated entity, generally fall below our expectations.”

A strong stance, but it’s perhaps not surprising considering the saga surrounding the LF Woodford Income Fund last year. As per my previous article, “Gated Funds: When the champagne goes flat,” the FCA is trying to address long trending risks in the industry around culture, liquidity, conflicts of interest, suitability and the propriety of products being sold to less sophisticated investors. Will the current COVID-19 crisis confirm the FCA’s concerns?

So, the FCA is asking CEOs to challenge the risks their asset managers represent, both to customers and to market integrity, with a view to develop mitigating strategies. “Nothing new there!”, I hear you say? However, these letters clearly show that the FCA has shifted its tone and intends to make senior managers, within asset management firms, more accountable and responsible for their overall actions or, perhaps more to the point, inactions. 

What to expect

With the extension of the Senior Managers and Certification Regime (SMCR) in December 2019, the FCA is asking asset managers to “refresh” their approach to governance, with a threat to hold those in senior management functions (SMFs) liable for governance failures. The U.K. regulator has warned firms not to treat SMCR as a discrete compliance project, but to use the opportunity to improve their existing standards of governance. 

Furthermore, the FCA will pro-actively assess the implementation of the new regime in the first half of 2020 to ensure that SMFs have clear responsibilities for which they can be held accountable. 

What does this mean for SMFs?

While firms will have assigned individuals to perform SMFs (in accordance with SMCR) it would be sensible to assiduously document and challenge all efforts by senior managers to upgrade governance especially when dealing with the challenges created by COVID-19. This documentation would demonstrate to the FCA that the implementation of SMCR is more than a compliance exercise.

With the increase in individual accountability (and therefore, personal liability), it would be wise for those performing SMFs to understand what they may be entitled to from their firm.

Senior managers should question their company’s directors’ and officers’ (D&O) insurance policy and determine whether it is fit for purpose.

Indemnification and insurance checklist for senior managers

Individuals fulfilling SMFs are those most likely to require access to independent legal advice. Such needs may occur when dealing with regulators when there’s potential for misalignment or conflict of interest, between themselves and companies.

As D&O policies do not typically provide such protection, it is important to ask for clarity in detail. Here are some suggestions:

  1. With which category of employee, and at what level of seniority, do I share the D&O limit purchased by the company on my behalf?
  2. Is my D&O limit also shared with the company? If so, to what extent?
  3. Is access to my D&O insurance policy dependent on a failure or refusal by the company to indemnify me?
  4. Does the company agree to indemnify me for all legal expenses, including independent legal advice, for pre-enforcement dealings with regulators? If not, has the company considered purchasing an additional insurance product for such occasions?
  5. What restrictions are imposed (both by indemnity and insurance) on my freedom to select lawyers of my choice for my defense?
  6. Does the policy allow for insurers to advance all legal expenses to me, pending resolution of any dispute?
  7. During the policy period, what protection do I have if I retire or resign? Or if the company is undergoing a merger or acquisition?
  8. Does my D&O policy contain a provision to enable me to take proceedings to clear my name in appropriate cases?

How are insurers reacting

For insurers, the rollout of SMCR to asset managers, and the recent issuance of the “Dear Chief Executive” letters by the FCA, has influenced underwriters to ask more probing questions. The questions being asked surround liquidity management and governance reviews, which includes understanding how an asset manager would mitigate product risk, such as those associated with greenwashing accusations. In addition, and not just because of COVID-19, questions around general operational resilience are also being asked, with particular focus on seeking comfort around cyber risk controls, business continuity management, performance and client communication.

In terms of products and environmental, social and governance (ESG), it’s not only the FCA that is making noise about this, but the U.S. Securities and Exchange Commission is also very much following suit and turning its attention to the issue as well.

Like the FCA, insurers want good governance to be top priority. After all, governance failure will not only cost an asset manager’s reputation but could equally impact the individual fulfilling the SMF and the insurance partners as well.

Remember it’s best to be proactive — you do not want to rely solely on insurance.

In conclusion

The “Dear Chief Executive” letters from the FCA should be viewed by senior managers as a “shot across the bow” to proactively deliver high standard governance as expected by the regulator. COVID-19 is not an excuse to relax governance controls. Obviously, things can go wrong but hindsight will be for the judgement of the FCA, as will the judgement of the individuals fulfilling SMFs and their level of conduct against the increased accountabilities and responsibilities expected of them whether during a pandemic or more normal times.


Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage.

The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication.

Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates.

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